S&P affirms foreign, local currency ratings on M’sia

> Its stance is underpinned by strong external position and considerable monetary policy flexibility

PETALING JAYA: S&P Global Ratings has affirmed its ‘A-’ longterm and ‘A-2’ short-term foreign currency sovereign credit ratings on Malaysia with a stable outlook on strong external position, considerable monetary policy flexibility and moderate fiscal deficits and government debt burden.

It also affirmed the ‘A’ longterm and ‘A-1’ short-term local currency sovereign credit ratings on Malaysia.

“The sovereign credit ratings on Malaysia reflect a strong external position and considerable monetary policy flexibility. We weigh these strengths against Malaysia’s moderate fiscal deficits and

government debt burden. In our view, ongoing political challenges in relation to the corruption allegations of 1Malaysia Development Bhd (1MDB) will not impede current policy flexibility and responsiveness,” it said in a statement yesterday.

The ratings are underpinned by Malaysia’s strong external position, which is a result of many years of substantial current account surpluses and which S&P believes can withstand a further slowdown in the oil and gas sector over the next two years.

“Likewise, external indicators are likely to remain unchanged, given our assumption of continued healthy trade surpluses. The weakened ringgit should continue to support the competitiveness of Malaysia’s manufactured goods, partially offsetting the impact of depressed energy prices,” it said.

S&P’s stable outlook reflects its expectation that Malaysia’s strong external position and monetary flexibility will balance its relatively weak, but stable, public finances over the next 24 months.

The ratings may be raised if stronger economic growth and fiscal efforts improve budgetary outcomes and in turn allows the government to substantially lower its debt burden. They may be lowered if Malaysia’s public finances or institutional settings weaken.

“Such a change could happen, for example, if the government reverses its recent fiscal measures or there is a material deterioration in political stability related to ongoing allegations against senior government officials. We may also lower the ratings if contingent liabilities increase such that we revise upward our assessment of the government’s debt burden.”

S&P expects net general government debt to peak at 51% of gross domestic product (GDP) in 2017 before modestly declining.

Malaysia’s general government fiscal position also carries contingent risks from its public enterprises and financial sector.

“These contingent risks include guarantees on debts and letters of support (including the US$3 billion letter of support for 1MDB, which we regard as a direct financial obligation of the government). We do not expect such contingent liabilities to materialise significantly within our forecast horizon.

“Malaysia’s public enterprises have diverse financial profiles – some with strong free cash flows and sizeable liquid assets that, in the past, have been used to support other parts of the public sector,” it said.

Malaysia’s fiscal performance improved, with the annual increase in general government debt averaging 6% of GDP over 2009-2012 while deficits have since been curtailed. S&P projected the average annual increase in debt at 2.9% of GDP over 2016-2019.

Although high household debt levels pose some risks, S&P believes it is somewhat contained by a banking sector that is well capitalised and has good regulatory record.